Is Yum Brands Finally Seeing a Turnaround?

With shares of Yum Brands (NYSE:YUM) trading around $72, is YUM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Yum Brands is a quick-service restaurant company based on a number of system units, with approximately 37,000 units in more than 120 countries and territories. The company — through its three main restaurant chains: KFC, Pizza Hut, and Taco Bell — develops, operates, franchises, and licenses a worldwide system of restaurants. These popular food chains prepare, package, and sell a menu of low-priced food items. Convenient and tasty foods continue to rise in popularity worldwide, which allows Yum Brands to provide food items demanded by consumers.

Yum Brands may finally be facing a turnaround in its struggling China businesses, Bloomberg reports. Yum posted just a 5 percent decline in same-store sales for the month of October, which was less than the 5.8 percent analysts had expected and significantly less than the 11 percent decline posted for September and the 10 percent decline posted for August. Yum may finally be coming out from under the avian flu scare and scandal over chicken that had too many antibiotics, both of which caused Chinese customers to avoid eating Yum’s chicken.

T = Technicals on the Stock Chart Are Strong

Yum Brands stock has been exploding higher in recent years. The stock is currently trending higher and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Yum Brands is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

YUM

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Yum Brands options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Yum Brands Options

21.988%

20%

18%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of Wednesday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Yum Brands’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Yum Brands look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-67.00%

-11.59%

-25.00%

-3.09%

Revenue Growth (Y-O-Y)

-2.89%

-8.33%

-7.58%

1.02%

Earnings Reaction

-7.24%

-1.14%

7.01%

-2.90%

Yum Brands has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been generally pleased with Yum Brands’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Yum Brands stock done relative to its peers – McDonald’s (NYSE:MCD), Wendy’s (NASDAQ:WEN), and Jack In The Box (NASDAQ:JACK) — and sector?

Yum Brands

McDonald’s

Wendy’s

Jack In The Box

Sector

Year-to-Date Return

10.25%

11.22%

83.83%

53.22%

40.63%

Yum Brands has been a poor relative performer, year-to-date.

Conclusion

Yum Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. The company may finally be facing a turnaround in its struggling China businesses. The stock has been surging higher and is currently trading near highs for the year. Over the last four quarters, earnings and revenues have been on a decline. However, investors have been generally pleased about the company’s recent earnings announcement. Relative to its peers and sector, Yum Brands has been a weak year-to-date performer. WAIT AND SEE what Yum Brands does in coming quarters.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.